In re WM Distribution, Inc., 571 B.R. 866

Background

WM Distribution, Inc. (WM) and Sandia Tobacco Manufacturers, Inc. (STM) are closely entwined: common management (Donna Woody runs both), overlapping ownership (members of the Packingham family), shared employees/facilities/insurance, and extensive intercompany transactions.
WM buys cigarettes from STM (prepetition debt ≈ $514,114), making STM WM’s largest unsecured creditor (≈50% of WM’s unsecured debt); WM also owns the Sandia trademark that STM uses without a licensing agreement.
STM previously filed chapter 11; the Davis Firm was approved as STM’s counsel in that case. The Davis Firm then sought employment as WM’s bankruptcy counsel under 11 U.S.C. § 327(a).
Creditors (Susan Jesmer, Donald Packingham) and the U.S. Trustee objected, arguing the Davis Firm’s simultaneous representation of STM and WM created disqualifying conflicts of interest.
The core contested practical issues: allocation/treatment of intercompany claims, trademark licensing, continuing commercial relationship (including whether WM should buy directly from the manufacturer), and other matters central to each debtor’s reorganization.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether simultaneous representation of WM and STM creates an actual conflict under § 327(a)/(c)	Davis Firm: dual representation does not create an actual conflict; §327(c) permits employment despite representation of a creditor absent an actual conflict	Objectors/UST: the firms’ common representation creates actual conflicts because of extensive intercompany claims and competing interests	Court: Denied — simultaneous representation creates multiple actual conflicts and disqualifies the Davis Firm
Whether potential conflicts can be cured by hiring separate conflicts counsel for WM	Davis Firm/WM: carve-outs and independent conflicts counsel can handle adverse matters; general counsel can remain for non-conflict issues	Objectors/UST: conflicts are central and pervasive; conflicts counsel would not cure divided loyalty on core reorganization issues	Court: Rejected — use of conflicts counsel is not viable because adverse interests are central and extensive
Whether inter-debtor claims automatically disqualify simultaneous representation	Davis Firm: inter-debtor claims are typical and do not per se prohibit dual representation	Objectors/UST: inter-debtor claims here are numerous and critical to reorganizations, creating active competition of interests	Court: No per se rule, but on these facts inter-debtor entanglements produce actual conflicts that disqualify counsel
Whether § 327(c) exception saves representation when UST/creditors object	Davis Firm: § 327(c) allows employment despite representation of a creditor unless an actual conflict exists	Objectors/UST: they have objected and shown actual conflicts exist	Court: §327(c) does not save the employment because an actual conflict exists and the Court must disapprove

Key Cases Cited

Interwest Bus. Equipment, Inc. v. McKinnon (In re Interwest Bus. Equipment, Inc.), 23 F.3d 311 (10th Cir. 1994) (simultaneous representation may be disallowed if it creates an actual conflict)
BH & P, Inc. v. Bourdeau (In re BH & P, Inc.), 949 F.2d 1300 (3d Cir. 1991) (inter-debtor claims do not automatically bar joint representation; case-by-case analysis required)
7677 East Berry Ave. Associates, L.P. (In re 7677 East Berry Ave. Assocs., L.P.), 419 B.R. 833 (Bankr. D. Colo. 2009) (discussing §327(a) thresholds and analysis for disinterestedness/adverse interest)
Project Orange Assocs., LLC (In re Project Orange Assocs., LLC), 431 B.R. 363 (Bankr. S.D.N.Y. 2010) (use of conflicts counsel can cure some dual-representation problems but is inappropriate where the conflict is central to reorganization)
Pillowtex, Inc. (In re Pillowtex, Inc.), 304 F.3d 246 (3d Cir. 2002) (distinguishing actual versus potential conflicts of interest)
Rome v. Braunstein, 19 F.3d 54 (1st Cir. 1994) (§327(a) requires undivided loyalty and untainted advice from retained professionals)